The proviso to s. 2(i) of the U.P. Sales Tax
Act, 1948 excludes from the term "turnover" proceeds of sale of
agricultural or horticultural produce grown by a person on any land in which he
has interest.

The assessee, who was an agriculturist, owned
tea gardens in the State. After being plucked from tea shrubs tea leaves are
withered in shade in rooms, crushed by hand or foot, roasted for 15 minutes,
then covered by wet sheets for the purpose of generating fermentation, graded
and finally roasted again with charcoal for obtaining flavour and colour. The
final product is sold in the market.

Before the Sales Tax Authorities the assessee
contended that tea leaves sold by him were agricultural produce grown by him on
his own land and that, therefore, the sale of tea effected by him was exempt
from sales tax under the proviso to s. 2(i) of the Act. The Sales Tax
Authorities rejected the assessee's contention. The High Court answered the
reference in favour of the assessee and against the revenue.

Dismissing the appeal,

HELD: (per Untwalia J.): The High Court was
right in holding that sales of tea leaves were not exigible to sales tax. The
commodity which was sold was not different from the commodity which was
produced in agriculture and, therefore, the proviso to s. 2(i) is attracted.
[600 F, 602 E]

1. Almost every kind of agricultural produce
has to undergo some kind of processing or treatment by the agriculturist
himself either on the farm or elsewhere in order to make it non-perishable,
transportable and marketable. Some minimal process is necessary to be applied
to many varieties of agricultural produce. The test in these cases is to see
whether in relation to that agricultural produce the process applied was
minimal or was so cumbersome and long drawn out that either in common parlance
or in the market or even otherwise no one would treat the produce as an
agricultural produce. The mere fact that in the case of a particular product
the process is a bit longer or even a bit complicated would not rob the produce
of its character of being an agricultural produce. [597 B-C; F-G]

2. All the processes enumerated by the
Revising Authority were necessary for the purpose of saving the tea leaves from
perishing, making them fit for transporting and marketing. The processes
applied were all within the region of minimal processes and at no point of time
they crossed that limit and robbed the leaves of their character of being and
continuing to be agricultural produce. [598 C-E] 594 Vol. 21 Encyclopaedia
Britannica (1968 edition), referred to.

In Killing Valley Tea Co. Ltd. v. Secretary
to State A.I.R. 1921 Calcutta, 40 the Calcutta High Court was of opinion that
while process of selecting and plucking tea leaves from the tea shrubs could be
deemed to be agriculture, the subsequent process which included drying and
rolling of the leaf was a manufacturing process. If the Calcutta High Court
could be said to have laid down that as a result of those processes the tea
leaf ceased to be agricultural produce, it is not correct. The tea leaf
remained what it always was. It was tea leaf when selected and plucked and it
continued to be tea leaf when after the process of withering, crushing and
roasting, it was sold in the market. The process applied was intended to bring
out its potential qualities of flavour and colour. The potential inhered in the
tea leaf from the outset when still a leaf on the tea bush. The potential
surfaced in the tea leaf when the mechanical processes of withering, crushing
and roasting, fermenting by covering with wet sheets and roasting again were
applied. At no stag, did it change its essential substance. It remained tea
leaf throughout. In its basic nature it continued to be agricultural produce.
[603 B-C]

CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 2361- 2364 of 1972.

Appeals by special leave from the Judgment
and Order dated 17-5-72 of the Allahabad High Court in Sales Tax Ref. Nos. 693
to 696/70.

S. C. Manchanda, Shiv Pujan Singh and M. V.
Goswami for the Appellant. (In all the appeals) V. S. Desai and Rameshwar Nath
for the Respondent.

The following Judgments were delivered:

UNTWALIA, J. The Commissioner of Sales Tax,
Lucknow has filed these four appeals by special leave against the judgment of
the Allahabad High Court given in four sales-tax references under the U.P.
Sales Tax Act, 1948, hereinafter referred to as the Act.

595 The assessee-respondent owns some tea
gardens in the State of U.P. The tea-leaves grown by the respondent in his
gardens are sold in the market after being processed and packed. The stand
taken on his behalf before the taxing authorities was that the tea-leaves sold
by the respondent are agricultural produce grown by himself and, therefore, the
sales were not exigible to sales-tax. The contention of the assessee was not
accepted and the final Revising Authority made four references in respect of
the four periods to the High Court on the following question of law:-
"Whether on the facts and circumstances of this case the article ceased to
be an agricultural produce and whether the tea produced by the assessee would
be exigible to sales tax?" The High Court has answered the reference in
favour of the assessee and against the revenue. Hence these appeals by the
department.

Under section 3, the charging section, of the
Act it was the turn-over for each assessment year determined in accordance with
the various provisions of the Act and the Rules framed thereunder, which was
chargeable to sales-tax.

The definition of 'turnover' given in section
2(i) of the Act at the relevant time stood as follows:- "
"Turnover" means the aggregate amount for which goods are supplied or
distributed by way of sale(or are sold), or the aggregate amount for which goods
are bought, whichever is greater by a dealer, either directly or through
another, on his account or on account of others, whether for cash or deferred
payment or other valuable consideration:

Provided that the proceeds of the sale by a
person of agricultural or horticultural produce, grown by himself or grown on
any land in which he has an interest whether as owner, usufructuary mortgagee,
tenant or otherwise, or poultry or dairy products from fowls or animals kept by
him shall be excluded from his turnover." The above proviso was meant to
exempt an agriculturist or a horticulturist from the charge of sales-tax in
respect of his agricultural or horticultural produce grown by himself in his
land in which he has an interest of the kind mentioned in the proviso. The
short question which falls for our determination, therefore, is whether the
assessee's transactions of sale came within the ambit of the proviso.

Indisputably and undoubtedly the assessee was
an agriculturist, the 596 tea-leaves grown by him in his land were agricultural
produce, and he had sold them after processing and packing.

In other words the assessee made them
marketable and fit for consumption by the consumers and then sold them. If the
tea- leaves so sold substantially retained the character of being an
agricultural produce, it is plain that the assessee's sales will not be
exigible to sales-tax. If, on the other hand, the leaves had undergone such
vital changes by processing that they lost their character of being an
agricultural produce and became a different commodity then the sales made by
assessee were exigible to sales-tax.

The High Court has extracted the primary
findings of fact recorded by the Revising Authority in its revisional order. As
is well-known tea-leaves are plucked from tea- plants as green tea-leaves. The
tea-leaves so plucked are not fit for consumption and are not sold in the open
market.

They are often purchased by big tea concerns
from the owners of the gardens and after processing and packing them they (the
concerns) sell them in the market. Since in their cases the proviso will not
apply the sales will be exigible to sales tax. But when the producer himself
does the same or similar kind of job, then the question arises whether it can
be justifiably said that he also cannot take advantage of the proviso? The
primary facts as extracted by the High Court from the order of the Revising
Authority are the following:- (1) "The tea-leaves were first of all
subjected to withering in shadow in rooms on a wooden floor for about 14
hours." (2) "then they were crushed-by hand or foot and were then
roasted for about 15 minutes." (3) "Later they were roasted on mats
for about 15 minutes." (4) And then they were "covered by wet sheets
for generating fermentation. During this process the colour of leaves was
changed from green to yellowish." (5) "the leaves were then subjected
to grading with sieves of various sizes. Fanning machines are also used in
completing the grading process." (6) "The produce was then finally
roasted with charcoal for obtaining suitable flavour and colour." 597 (7)
"It is this final product which was eventually sold by the
assessees." The question for consideration is whether on the findings
aforesaid it can be justifiably held in law that the leaves lost their
character of being an agricultural produce and became something different. It
should be remembered that almost every kind of agricultural produce has to
undergo some kind of processing or treatment by the agriculturist himself in
his farm or elsewhere in order to bring them to a condition of
non-perishability and to make them transportable and marketable. Some minimal
process is necessary to be applied to many varieties of agricultural produce.
As for example, when wheat stalks are cut from the farm, threshing and
winnowing have to be done. The product so obtained has to be dried for a few
days. The husk and dust have to be separated. Thereafter packing the wheat in
bags or other containers it is taken to the markets for sale. One can never
suggest that such a wheat product becomes a commodity different from the one
which was produced in the process of agriculture. To pursue that example
further, if the agriculturist who produces the wheat has a flour mill and
crushes the wheat produced by him in that mill and then if the flour so
produced is sold by him one can never reasonably suggest that the flour sold by
him is an agricultural produce, because in that event, the manufacturing
process goes beyond the limit of making the agricultural produce fit for marketing
as such and turns it into a different commodity altogether i.e. flour. But
there may be some other kinds of agricultural produce which required some more
processing to make it marketable. In the case of such a commodity what one has
to judge is to find out whether in relation to that agricultural produce the
process applied was minimal or was it so cumbersome and long drawn that either
in common parlance, or in the market, or even otherwise, anybody would not
treat the produce as an agricultural produce. The mere fact that in the case of
a particular product the process is a bit longer or even a bit complicated will
not rob the produce of its character of being an agricultural produce. Largely
the inference to be drawn from the primary facts of processing, one may say,
will be an inference of fact. But it is not wholly so. In a given case it will
be a mixed question of fact and law. If wrong tests are applied in drawing the
inference that the agricultural produce has lost its character of being so, then
it will be a question of law and the High Court will have jurisdiction in an
appropriate reference, as in the present case it had, to decide whether the
case came under the proviso to section 2(i) of the Act.

598 Unlike many agricultural products tea-leaves
are not marketable in the market fresh from the tea gardens. Nobody eats
tea-leaves. It is meant to be boiled for extracting juice out of it to make tea
liquor. Tea-leaves are, therefore, only fit for marketing when by a minimal
process they are made fit for human consumption. Of course, the processing may
stop at a particular point in order to produce inferior quality of tea and a
bit more may be necessary to be done in order to make it a bit superior. But
that by itself will not substantially change the character of the tea-leaves,
still they will be known as tea-leaves and sold as such in the market. In my
opinion all the six processes enumerated above from the primary findings of
fact recorded in the order of the Revising Authority were necessary for the
purpose of saving the tea-leaves from perishing, making them fit for
transporting and marketing them. The process applied was minimal. Withering,
crushing and roasting the tea-leaves will be surely necessary for preserving
them. The process of fermentation or final roasting with charcoal for obtaining
suitable flavour or colour and also the process of grading them with seives
were all within the region of minimal process and at no point of time it
crossed that limit and robbed the tea-leaves, the agricultural produce, of
their character of being and continuing as such substantially. In my opinion,
therefore, the view expressed by the High Court is quite justified and
sustainable in law.

In Volume 21 of Encyclopaedia Britannica
(1968 edition) under the head 'Tea' are dealt with at page 739 the processes of
cultivation and manufacture of tea. Under the sub-head 'Cultivation' it is
found stated:- "Tea leaves are plucked either by hand or with special
shears. In the tropical areas of southern India, Ceylon, and Indonesia, harvest
continues throughout the year, but in the subtropical regions of northern India
and China and in Japan and Formosa, the harvests are seasonal. The flavour and
quality of the tea-leaves vary with the climate, soil, age of the leaf, time of
harvest (even from season to season), and method of preparation." Then
comes the sub-head 'Manufacture' which enumerates the categories of three
classes of teas and then it is mentioned:- "Most stages of processing are
generally common to the three types, of tea. First, the fresh leaves, are
withered by exposure to the sun or by heating in trays until pliable (usually
18-24 hours). Next the leaves are rolled by hand 599 or machine in order to
break the leaf cells and liberate the juices and enzymes. This rolling process
may last up to three hours. Finally, the leaves are completely dried either by
further exposure to the sun, over fires, or in a current of hot air, usually
for 30- 40 minutes." In making black tea, the leaves, after being rolled,
are fermented in baskets or on glass shelves or cement floors under damp
cloths. "The process of fermentation, or oxidation, reduces the
astringency of the leaf and changes its colour and flavour." About
green-leaves it is mentioned- "Green tea is made by steaming without
fermentation in a perforated cylinder or boiler, thus retaining some of the
green colour. The leaves are lightly rolled before drying." It would thus
be seen that the tea-leaves as plucked have got to pass through stages of
processing of one kind or the other in order to make them fit for human
consumption, as in the case of paddy and many other commodities dehusking in
the case of former and some other kind of process in regard to the latter has
got to be done in order to make them marketable and fit for consumption.

There are two decisions of the Madras High
Court in The State of Madras v. R. Saravana Pillai(1) and N. Deviah Gowder v.
Commercial Tax Officer, Coimbatore(2) where a similar question arose with
respect to arecanuts. At page 544 of the first case which was followed in the
second occurs a passage which may be usefully quoted here:- "As we have
pointed out, it was common ground that there is no market in Coimbatore or
elsewhere for arecanuts as they are when plucked from the trees, and it should
be remembered they are gathered when they are still unripe. The proviso to
section 2(i) of the Act is obviously conceived in the interests of
agriculturists.

It excludes from any tax liability under the
Act sale of agricultural and horticultural produce, the primary condition to be
satisfied being that it must be produce of the land which either belongs to the
seller or of the land in which he has an interest as specified by section 2(i).
To restrict that concession to sale of arecanuts, for instance, only if those
arecanuts are sold in the state in which they are immediately on being gathered
from the trees, would render the statutory exclusion meaningless." I
approve of this decision.

600 There are two decisions of the Bombay
High Court given in relation to the question of sugarcane being converted into
jaggery. They are:-R. B. N. S. Borawake v. The State of Bombay(1) and
Commissioner of Income-Tax, Poona v. H.G. Date.(2) In the former case it was
observed at page 11:- "It is true that gur cannot be regarded as an
agricultural produce grown on land. But if gur is prepared out of the
agricultural produce which is grown on land, in the absence of any indication
to the contrary suggesting that the agricultural produce must be sold in the
form in which it is grown, we will be justified in holding that an
agriculturist who is exclusively selling agricultural produce grown on the land
either in the form in which it is grown or in the form in which it is converted
for the purpose of transportation or preventing deterioration is within the
exception provided by section 2(6). In the present case, with a view to prevent
deterioration and for the purpose of facilitating transportation the assessee
converted the sugar-cane grown by him into gur and sold it." It appears to
me that this case has gone a bit too far and on an appropriate occasion it may
require further consideration. Nonetheless, in the instant case one can safely
conclude, as I have done, that with a view to prevent deterioration and for the
purpose of facilitating transport and making it marketable the assessee himself
did some processing to the plucked tea-leaves and hence the High Court was
right in holding that such sales were not exigible to sales-tax. Similar or
identical principles have been applied by other High Courts also in respect of
different commodities such as rubber, sole crepe, casuarina, pig bristles etc.
The cases are-Deputy Commissioner of Agricultural Income-Tax and Sales-Tax,
South Zone v. Sherneilly Rubber & Cardamom Estates Ltd. & Others(3).

Reliance on behalf of the Revenue was placed
upon a few cases. None of them supports the department's contention. I may
notice only two or three of them. In Killing Valley Tea Company, Ltd. v.
Secretary to State(3) the question for consideration related to the tax
liability of the Killing Valley Tea Company under the Income Tax Act, 1918. If
the whole of its income was derived from agriculture, the assessee was not
liable to pay income-tax. If, however, the activities of the Company, which
produced income were attributable partly to agriculture and partly to its
manufacturing activities, then the whole of the amount could not have been
taxed under the Income-Tax Act. The stand of the Company was-"the actual
leaf of the tea plant, without the addition thereto of the processes above
described, is of no value as a market commodity." On behalf of the Revenue
it was contended "that the manufacturing processes carried out in a modern
tea factory, with scientific appliances and up- to-date machinery, are
different from those ordinarily employed by a cultivator to render the produce
raised by him fit to be taken to market." The High Court held-"that
the process in its entirety cannot be appropriately described as agriculture.
The earlier part of the operation when the tea bush is planted and the young
green leaf is selected and plucked may well be deemed to be agriculture. But
the latter part of the process is really manufacture of tea, and cannot,
without violence to language, be described as agriculture.

The green leaf is not marketable commodity
for immediate use as an article of food, but it is a marketable commodity to be
manufactured by people who possess the requisite machinery into tea fit for
human consumption." After referring to some authoritative books on Tea,
the view expressed by the High Court was "that the entire process is a
combination of agriculture and manufacture." Hence only a part of the
income was held to be taxable. In the instant case the problem is quite
distinct and different. Here we are concerned with the question whether the
commodity which the assessee sold as tea was his agricultural produce or not.
He had not sold his tea-leaves from his gardens to any manufacturing tea 602
company. He had himself applied some indigenous and crude manufacturing process
in order to enable him to sell his tea in the market. In such a situation I
have no difficulty in holding that the sale was of his agricultural produce.

In The State of Madras v. Swasthik Tobacco
Factory(1) the question before this Court was whether the respondent- firm
which purchased raw tobacco and converted it by a manufacturing process into
chewing tobacco and sold it in small paper packets was entitled to deduction of
excise duty paid by it on the raw tobacco from the gross turnover of sales of
chewing tobacco under rule 5(1)(i) of the Madras General Sales Tax (Turnover
and Assessment) Rules, 1939. It would be found mentioned at page
318:-"Both the advocates argued, on the basis of the factual position,
that the packets of chewing tobacco were goods different from tobacco from
which the said goods were manufactured." On that footing, by
interpretation of the rule it was held that only excise duty paid on the goods
sold by the assessee is deductible from the gross turnover, and not the excise
duty paid on raw tobacco. This case was followed by the Supreme Court in The
State of Madras v. Bell Mark Tobacco Co.(2) In the instant case I have held
that the commodity which was sold was not different from the commodity which
was produced in agriculture.

The view expressed by the Allahabad High
Court in the judgment under appeal which is reported in D. S. Bist & Sons,
Nainital v. Commissioner of Sales Tax, U.P.(3) is on the lines of the
preponderance of views expressed by different High Courts in relation to
different commodities.

I approve of the case and dismiss these appeals
with costs- hearing fee-one set only.

PATHAK, J. I agree that the appeals should be
dismissed.

But I should like to say a few words in
regard to Killing Valley Tea Company, Ltd. v. Secretary to State.(4) That was a
case where the Killing Valley Tea Company, Ltd.

had a tea plantation and after selecting and
plucking the young green leaf from the tea bush by hand it was put through a
process of drying and rolling. The Income Tax Department alleged that the
process actually applied to the dry leaf was a manufacturing process carried
out in a modern tea factory with scientific appliances and the latest
machinery. The 603 Calcutta High Court, on a consideration of the respective
cases of the parties, observed that the entire process could not be described as
agriculture, and that the process applied to the tea leaf after it had been
plucked was a manufacturing process. It observed that the green tea leaf was a
marketable commodity to be manufactured by people who possessed the requisite
machinery into tea fit for human consumption. It was of the opinion that while
the process of selecting and plucking the tea leaf from the tea shrubs could be
deemed to be agriculture, the subsequent process which included drying and
rolling of the leaf was a manufacturing process. The High Court drew a
distinction between the two processes for the purpose of apportioning the
income between agricultural income and non agricultural income. The question
before us is whether after the tea leaf had been put through the process of withering,
crushing, roasting and fermentation it continued to be agricultural produce. If
the Calcutta High Court can be said to have laid down that as a result of those
processes the tea leaf ceased to be agricultural produce, I am unable to agree
with it. To my mind, the tea leaf remained what it always was. It was tea leaf
when selected and plucked. and it continued to be tea leaf when after the
process of withering, crushing and roasting it was sold in the market. The
process applied was intended to bring out its potential qualities of flavour
and colour. The potential inhered in the tea leaf from the outset when still a
leaf on the tea bush. The potential surfaced in the tea leaf when the
mechanical processes of withering, crushing and roasting, fermenting by
covering with wet sheets and roasting again were applied. The tea leaf was made
fit for human consumption by subjecting it to those processes. At no stage. did
it change its essential substance. It remained a tea leaf throughout. In its
basic nature, it continued to be agricultural produce.

The appeals fail and are dismissed with
costs. Costs are awarded as one set only.